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On a reported basis, the company registered earnings of 27 cents per share compared with 38 cents in the comparable year-ago quarter.

Net sales in the quarter increased 6.1% to $673.4 million from the year-ago quarter. On an organic basis, the company’s wine and spirits sales rose 4% year over year. Net sales gained on the back of higher volumes and better product mix in the wine and spirits business, coupled with the benefits of the Mark West acquisition. However, quarterly net sales missed the Zacks Consensus Estimate of $751.0 million.

Cost and Margin Performance

Cost of products sold escalated 8.6% year over year to $417.3 million in the quarter and based on net sales, it expanded 150 basis points (bps) to 62.0%, primarily due to higher grape costs. Consequently, adjusted gross profit margin contracted 130 bps to 38.3%. However, adjusted gross profit increased 2.3% to $257.6 million.

Adjusted selling, general and administrative (SG&A) expenses augmented 26.2% to $154.0 million in the quarter. Based on sales, it increased 370 bps to 22.9% from the comparable prior-year quarter. Due to increased grape costs and higher operating expenses, Constellation Brands' adjusted operating income decreased 5.5% to $103.6 million from $109.6 million in the year-ago quarter. Adjusted operating margin contracted 190 bps to 15.4%.

Including equity earnings from its 50% interest in the Crown joint venture, the company reported adjusted earnings before interest and tax (EBIT) of $170.3 million, almost flat with the year-ago quarter.

During the quarter, the company’s interest expense soared 8.0% to $54.8 million, primarily driven by escalated average borrowings.

Financial Position

Constellation Brands, which competes with Companhia de Bebidas Das Americas, or AmBev , Beam Inc. and Molson Coors Brewing Company (TAP - Analyst Report) ended the quarter with cash and cash investments of $609.3 million. During the quarter, Constellation Brands generated $3.3 million of cash from operations compared with $96.4 million at the end of first quarter of fiscal 2013. Through the same time period, the company utilizes $19.0 million of its free cash flow compared with the generation of $77.0 million in the prior-year period.

Fiscal 2014 Outlook

Considering the positive impact from the recent acquisition of Grupo Modelo, management raised its guidance for fiscal 2014. Constellation Brands now expects fiscal 2014 adjusted earnings to come in the range of $2.60–$2.90 per share, compared with $2.55–$2.85 projected earlier. On a reported basis, earnings per share in fiscal 2014 are now anticipated in the $2.32–$2.62 per share range, up from the previous guidance of $2.29–$2.59.

Certain factors were considered before providing the guidance, such as an interest expense expectation in the range of approximately $325–$335 million, an approximate tax rate of 37% and weighted average diluted shares outstanding of approximately 199 million.

Constellation Brands, which currently carries a Zacks Rank #3 (Hold), is expected to incur capital expenditures to the tune of $200–$230 million, including about $120–$140 million for the expansion of the Piedras Negras brewery. Moreover, the company anticipates generating free cash flow in the range of $475–$575 million.

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